Buybacks (part 2)

To follow a theme outlined a couple of weeks ago, my going forward intent in my random musings segments is to view some of the issues of the 2020 presidential campaign under discussion.  My investing rationale has always been that to be successful, one has to understand all possible outcomes which means digging through a lot of crap to discern viable opportunities. It would appear at this early stage that much like 2016, 2020 will have plenty of that to wade through.  As an added bonus, I don’t want to disappoint my newest audience demographic by suppressing my irreverence. As always, these are only observations awaiting an investing opportunity that may never present itself.

The Pitchfork Economics series on buybacks continued on February 26th with Sen. Cory Booker (one of the multitude of Democratic presidential contenders) as a guest discussing his new bill, Workers Dividend Act.  Evidence cited to support his cause is twofold.

  1. American Airlines (AAL) wage increase was roundly panned by analysts.   Booker states the analyst opinions were misguided – which is true. To parlay these opinions into supporting rationale against buybacks is equally misguided as these were partially collectively bargained.  (i.e., benefit to unionized employees which is a goal of the bill.)
  2. His use of Walmart (WMT) as the proverbial case of buyback greed ignores some aspects that are detrimental to his position.  Walmart offers its’ employees matching 401K plans, stock ownership plans with a 15% discount and HSAs, of which some – if not all – allow employees to share proportionately in the “wealth” gained through buybacks.  The choice resides with the employee as to participation.

In an attempt to frame rhetoric with reality, I chose my oldest 15 holdings to identify what happened over the past three years.

Company201820172016
Comcast3.05% decline1.83% decline 3.18% decline
WEC Energy 0.09% decline .09% incr. 16.21% incr.
Chevron0.46% incr.1.33% incr.0.11% decline
Kimberly-Cl.1.77% decline 1.6% decline 1.26% decline
Norf. Southrn3.48% decline 1.93% decline 2.76% decline
Clorox1.19% decline 0.11% decline 0.8% decline
Prosperity B.0.51% incr. 0.28% decline 0.53% decline
Sysco0.5% decline5% decline 3.26% decline
Owens & Minor0.0% change 0.16% decline 0.16% decline
Walt Disney1.51% decline 3.72% decline 4.1% decline
Home Depot2.81% decline 3.82% decline 4.68% decline
PepsiCo0.9% decline 0.96% decline 2.22% decline
Kimco Realty0.62% decline 1.03% incr.1.66% incr.
Towne Bank0.13% incr.0.08% incr.1.05% incr.

Data from MacroTrends

In this scenario (excluding increases denoted bold/italic), the buybacks – as a percentage of the stock outstanding – actually decreased during each of Trump’s years as president despite the tax plan (from 2.1%/1.94%/1.45%).  Companies increasing their share count did so generally to use as currency in lieu of debt. In Chevron’s case this was to fund capital expenditures. Most of the others were for acquisitions.  It’s only slightly ironic that a merger cutting jobs and increasing capital concentration (banking sector) would be viewed more favorably due to an expanding share count

This discussion topic has also been picked up by Mr Tako Escapes who elaborates more skillfully than I.  I don’t dispute two points here, 1) Companies tend to have poor judgement in the timing of these transactions (buy high) and 2) the dollar amounts being expended.  But a dose of reality has to exist as well, I mean – realistically how many capex dollars should be spent to further the worldwide glut of steel (as one example)?

At least this exercise has been interesting but to draw any real conclusions requires a larger sample size.  More questions will also arise such as, ‘Are buybacks more prevalent in the overall S&P universe moreso than the DGI slice?’ or ‘Is my portfolio a large enough sample to be reflective of the stats bandied about by the Democratic candidates?’.  As usual in this blog, more questions than answers. I intend to complete this exercise for all of my holdings during the year

Other concepts will likely hit the garbage heap prior to getting much traction including a wealth tax (constitutional issues) and Modern Monetary Policy (hyperinflation).  As an aside, these concerns, per David McWilliams piece entitled Quantitative easing was the father of millennial socialism as presented by Ben Carlson makes for an interesting case. It certainly appears that the 2020 election season is off to a rousing start. Bottom line, I suspect some candidates will use this issue as a cry to rally the base with minimal substance to follow – similar in many ways to “Build the Wall” of yesteryear.  A reflection of what little has been learned over the last two years. In my mind not an investable theory.  

As always, opinions are welcome!

November 2018 Update

To my surprise, the S&P shrugged off the headlines last weekend finishing the month positive.  While I agree with  Joseph Calhoun’s assessment:

There have been a litany of one-off events over the last year that made GDP growth look better than the underlying trend. We should call the last year – with rebuilding from four hurricanes, front running of tariffs and a federal budget blowout – the Potemkin economy. It looks okay on the surface but there isn’t any depth to it. And I think we’re about to find out what it really looks like behind the facade as those three big artificial stimuli wear off.

We will probably have to wait until the first quarter to be able to get a peek behind that curtain.  So November was kind to the index, allowing it to recover a little from October’s nasty drop – settling up 1.8%.  Meanwhile my portfolio outperformed the index again, registering a gain of 2.54%.  YTD I’m ahead of the S&P by 2.1%.

Portfolio Updates:

  • initiated new position: AFG (in time to collect the special dividend)
  • added to WEC (missed to ex-div)

DIVIDENDS

My main focus resides on dividends.  Market gyrations are to be expected but my goal is to see a rising flow of dividends on an annual basis.  I’m placing less emphasis on the quarterly numbers as the number of semi-annual, interim/final and annual cycles have been steadily increasing in my portfolio.

  • November delivered an increase of 46.72% Y/Y, the impacts being dividend increases and especially special and merger dividends.
  • November delivered a 5.13% decrease over last quarter (Aug) attributable to semiannual cycles.
  • Dividend increases averaged 15.38% with 77.58% of the portfolio delivering at least one increase (including 2 cuts (GE, SRC).
  • 2018 Dividends received were 111.48% of 2017 total dividends exceeding last year’s on October 19th.

Note: I updated my Goals page to provide a visual of these numbers.  Based on Mr All Things Money’s instruction set with a conversion to percentages.  My code only updates when the monthly Y/Y number is exceeded.  Otherwise, the prior year actual is used.

Spinoffs:

GE‘s rail unit to spin then merge with WEB

GE to spin 80% of the health business (maybe)

NVS proposed spin of Alcon scheduled for shareholder approval Feb 2019

On Oct 4, MSG filed a confidential Form 10 to spin the sports business

Mergers:

XRX merger with Fujifilm cancelled (still being litigated).

SHPG to merge into TKPYY (regulatory approvals received, pending shareholder vote)

GBNK to merge into IBTX (shareholders approved)

GNBC to merge into VBTX (semi-reverse)

BNCL to merge into WSFS

BHBK to merge into INDB

Summary

This month should be fairly benign on activity with a couple of rebalances planned on about 5% (perhaps less) of the portfolio.  End result will be an increase in some holdings – and perhaps one new – as part of my excess cash will be deployed.

Hope your November was equally as good – or better!

 

Road Trip Musings

Settling in at home after wandering the country a little, provides an opportunity to reflect on my observations, discussions and tenor of the people I engaged with.  I thoroughly enjoyed the visits and sometimes lively discussions and following are a sampling of these.  There is but one potential action item for my portfolio review – which is less than normal for these adventures.

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2017 Mid Year Correction

Each year I establish a basic plan to govern my investing activity based on sectors, segments or locales able to deliver a little alpha to my portfolio.  The past couple of years had a focus on the Financial industry with the outcome being rewarded with mergers (small banks) and outsized dividend increases (money center banks).  I also began increasing my Canadian allocation in 2015 from 2.5% of my dividends to the current 8.6%.  Since the election, I was accelerating the increase in my other foreign holdings to the current 13.6% on two theories, 1) gridlock in Congress would persist as the Republican majority would be too narrow to push through sweeping changes, and 2) this inaction would result in a weaker dollar.  It appears I was correct on both counts as the US dollar is now at an eight month low.

With my alpha agendas now too pricey (at least for slam dunk results), a re-prioritization is in order. With the Fed Chairs’ testimony this week indicating that GDP growth of 3% would be difficult, the Trump agenda which projects a higher growth rate is likely in peril – even ignoring the self-inflicted wounds.  Without an improvement in the GDP, deficit hawks will be circling.  It is likely the last half of the year will present some opportunities, but my view these will be predicated on external events.  My eyes will remain open to the USD exchange rate – on strength I may buy foreign issues.

My portfolio allocation between holdings labeled Anchor, Core and Satellite have been imbalanced for a year or two primarily due to merger activity and the acceleration of adding foreign issues.  Now that the major mergers have completed, the last this past January, and other alternatives are slim, I figure it’s time to get back to basics.

My going forward strategy can be summarized as follows:

  1. Non-US equities when secured at a favorable exchange rate
    a)I have 2 Japanese, 2 Swiss, 1 UK and 1 Swedish company on my watch list in the event an attractive price presents itself
  2. Assess corporate actions (spins, splits, mergers) for opportunities
    a) Generally I’m agnostic to splits except when the result would be a weird fractional.  I can easily manage tenths or hundredths of shares.  Smaller sizes are troublesome so I avoid when possible.
    b) Spins (and mergers) are assessed to prevent (if possible) weird fractionals.  For instance, I added to my MET position earlier this month as their spin will be at a ratio of 11:1 which would have otherwise delivered a weird fractional.
  3. Assess portfolio for average down and other opportunities
    a) An example of this was last months’ purchase of KSU.  To this end, I recently updated my Dividends (Div Dates) Google sheet to flag when the current price is lower than my cost basis.
    b) An example of “Other Opportunities” would be BCBP which is resident in my Penalty Box due to dilution.  The dilution (secondary) might be explained (now) with their announced acquisition of the troubled IA Bancorp.  If the regulators provide their seal of approval, it may be time to remove BCBP from Penalty status and perhaps add to this 3.5% yielder.
  4. Add to holdings that are below target weighting
    a) This is where I expect most of my second half activity to reside.

Of my 26 stocks labeled Anchor, Core or Satellite; 5 can be considered at their target weight (within .5% of the target) and 4 I consider to be overweight.  The remaining 17 will receive most of my attention.  As most of these rarely go on sale, I’ll likely ignore price and place a higher priority on yield and events – at least until I’ve exceeded last years’ total dividends.

The following table highlights this portion of my portfolio:

JAN/APR/JUL/OCT

COMPANY TYPE PORT DIV%
Kimberley-Clark/KMB A-(6%) 4.01%
First of Long Island/FLIC C-(3%) 0.85%
Sysco/SYY C-(3%) 1.81%
Bank of the Ozarks/OZRK C-(3%) 0.67%
PepsiCo/PEP S-(1.5%) 1.51%
First Midwest/FMBI S-(1.5%) 0.3%
Comcast/CMCSA S-(1.5%) 8.32%
Toronto-Dominion/TD S-(1.5%) 1.58%
NOTE: Not all payment schedules coincide completely

FEB/MAY/AUG/NOV

COMPANY TYPE PORT DIV%
Clorox/CLX A-(6%) 3.68%
PNC Financial Services/PNC C-(3%) 0.30%
Legacy Texas Financial/LTXB C-(3%) 1.48%
Starbucks/SBUX C-(3%) 1.07%
Blackstone/BX S-(1.5%) 2.58%
Apple/AAPL S-(1.5%) 1.26%
Lakeland Bancorp/LBAI S-(1.5%) 1.04%
Webster Financial/WBS S-(1.5%) 0.82%
NOTE: Not all payment schedules coincide completely

MAR/JUN/SEP/DEC

COMPANY TYPE PORT DIV%
WEC Energy/WEC A-(6%) 5.61%
3M/MMM C-(3%) 0.76%
Home Depot/HD C-(3%) 7.32%
Blackrock/BLK C-(3%) .22%
ADP/ADP C-(3%) 1.60%
Southside Bancshares/SBSI S-(1.5%) 0.96%
Chevron/CVX S-(1.5%) 9.52%
Norfolk Southern/NSC S-(1.5%) 1.99%
Flushing Financial Corp/FFIC S-(1.5%) 0.99%
Wesbanco/WSBC S-(1.5%) 1.14%
NOTE: Not all payment schedules coincide completely

I will provide the caveat that this plan is subject to not only the whims of  the market but of my own as well.  In addition, this plan may be changed if/when a better idea comes along.

The One Metric

Investment Hunting just started a Blogger Interview series with an interesting interview with Roadmap2Retire a few days ago (June 21). One question in particular caught my attention, If you could only use one metric to evaluate a stock, which one would you choose? Sabeel’s answer was spot on in my book (I don’t think there is one metric that can be used to evaluate stock. If everything could be boiled down to one single number, investing would be easy. The reality is that investing in a company is a multifaceted aspect and there a hundreds of things to consider – both from a qualitative and quantitative standpoint.), but led me to ponder the proverbial what if: If there were only one which would it be?

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Portfolio Weightings

When I researched my holdings and dividends for my quarterly review, I noticed something that required further analysis.  I put it aside while completing my taxes, but resolved to readdress it.  The issue is portfolio balance – or more specifically – being out of balance.  I noticed over the past few months that portions of my portfolio were sliding farther from their assigned allocations.  I currently rank my holdings by value (price * # shares).  I then weight by category.  The companies I’ve identified as Anchor positions would comprise a maximum 18% of the total value.  Frankly, none of these positions has yet attained the 6% threshold since I only added this category last year.  WEC (5.4%), CLX (4.6%) and KMB (3.8%) hold these slots and I haven’t been adding to them this year outside of dividend reinvestment due to valuation.  So my ‘heavy hitters’ aren’t out of balance.

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Winter Is Here

As winter arrives and the holiday season is upon us, I have to admit I’m somewhat at a loss this year.  Years past, I’d be reviewing natural gas inventories and weather outlooks to determine if additional funds should be allocated to my utilities.  This year WEC has already forecast their 2016 dividend policy and I’m waiting for Piedmont‘s merger to close – so nothing to do on this front.  Christmas shopping is complete – check.

Several of you have presented your 2016 goals already.  Good for you!  Call me old-school, or a procrastinator or a slug.  Continue reading